Confident consumers propping up economy ahead of holidays
Spending comes amid modest wage growth, but there are signs of slowing
It’s the most wonderful time of the year for retailers — and this year could be even better.
As retailers gear up for the holiday shopping season, the American consumer is in the best shape in more than a decade. After a long, difficult slog after the Great Recession, the spending power of the consumers is as strong as ever. Unemployment is low, incomes are rising, inflation is subdued and confidence is high.
Even as businesses have pulled back over concerns about the U.S.-China trade war and a slowing global economy, consumers appear to be plowing ahead. And a good thing, too. Consumer spending accounts for about 70 percent of U.S. economic activity and remains a bright spot amid more ominous signs for the economy.
“The consumer is driving growth in the economy right now,” said Tyler Atkinson, an economist
at the Federal Reserve Bank of Dallas.
Feeling good
U.S. consumers’ confidence has significantly improved since the Great Recession, climbing as the unemployment rate fell and households found better financial footing.
Consumers by and large are reacting to a record economic expansion now approaching its 11th anniversary, experts said. Local unemployment rates remain at record lows across the country, including in Texas, where the jobless rate has been sitting at a historic low of 3.4 percent. At the same time, wages are rising (albeit not as quickly as in 2017 and 2018).
Disposable income, too — the money left over after paying for taxes and other essentials such as food, housing and utilities — has risen steadily in the United States since the last recession, growing by 25 percent in the last five years alone. At the same time, inflation has remained subdued, even trending down over the last five years. In September, the inflation rate was 1.7 percent while wages grew 2.8 percent from the prior year.
Rising health care costs and ballooning student debt are weighing on households and present long-term challenges to the economy, but so far, in a tight labor market, consumers feel confident enough about their jobs and earnings to keep spending, analysts said.
“When you add all that up, it looks to us that the consumer is in a strong spot heading into the holiday season,” said John Leer, an analyst with Morning Consult, a market research company.
Slowing down
But the reliable boost U.S. households have provided the economy shows signs of subsiding. The growth in household spending held steady at 3.9 percent in September compared to a year earlier, but that’s a significant downshift from 5.2 percent in 2017.
The slowdown in spending correlates with how optimistic households are feeling. The consumer confidence index, produced by the Conference Board, a business-financed research group, shows that consumer confidence is high, but has plateaued. The index peaked at 137 in October 2018, a fell as low as 121 after the stock market rout at the end of last year (anything over 100 indicates an optimistic outlook). In September, the index level at 126.3 was nine points lower than September 2018.
The reason consumers are not feeling better about the economy is the economic expansion is beginning to show its age. The labor market is probably as tight as it can get, said Atkinson of the Dallas Fed. After so many consecutive recovery years — people going back to work and getting raises — many households feel as though they’re simply charting a steady course of financial stability, rather than seeing noticeable gains year after year.
As a result, consumer spending has shown signs of slowing in recent months, rising only 2.2 percent over August and
September from last year, compared with more than double that rate earlier this year, according to analysis by the Dallas Fed.
“The consumer sees that things are good but not getting better,” Atkinson said. “We’ve gone from fast (growth) to normal, and that can feel painful, but it’s not necessarily a bad thing to slow.”
What tariffs?
Slowing consumer spending may pose a problem for policymakers in 2020. The Federal Reserve has already cut rates three times in 2019 on concerns about global economic weakness and trade tensions between the U.S. and China that have hurt business investment.
But so far, the dispute has largely spared U.S. households as tariffs placed on Chinese goods have yet to get passed on to consumers, analysts said.
That’s because many U.S. businesses increased inventories in anticipation of the dispute to avoid tariffs, which lessened the blow for consumers, according to an analysis of Census data by Morning
Consult. And large retailers with significant market power, such as Target or Walmart, can force suppliers to absorb the cost of the tariffs rather than passing them on to their customers.
“Price inflation has not kicked in like people expected with the tariffs,” said Leer, of Morning Consult. “And I don’t see them kicking in in time for the holiday season.”
The trade situation still poses a risk, though. If a negative news, such as major setback to U.S.China trade talks, sends stocks plunging, consumers — many with 401(k)s and other stock holdings — may feel less wealthy and tighten spending.
It’s energy, stupid
In the Federal Reserve’s 11th district, which includes all of Texas and northern Louisiana and southern New Mexico, consumer confidence has tended to be a little higher in recent years than other areas of the country, according to data analyzed by Morning Consult. The reason could be political. The region leans conservative, and conservatives tend to be more confident in the economy when a Republican is president, just as liberals tend to be more confident in the economy when a Democrat is president.
The Texas region, however, was the only district where consumer confidence did not improve in November, most likely due to the recent troubles for the oil and gas industry, according to analysis by Morning Consult.
The continuing trade war between the United States and China has contributed to a global economic slowdown, depressing energy demand and oil prices, which remain stuck in the $50 to $60 a barrel range. That is barely enough for many oil companies to make money, which has led several to cut back on spending and workforce.
“The energy sector is not where it was,” Leer said. “It wouldn’t be surprising if energy jobs dry up, hours are cut back, and that starts hitting consumers.”